Abstract
We measure the welfare consequences of endogenous choice in imperfectly competitive markets. We introduce the concept of a quality markup and measure the relative welfare consequences of market power over price and quality. For U.S. paid-television markets during 1997-2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for quality inflation by monopolists is at odds with classic results in the literature.
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